Inflation is the general rise in the price of stuff. And as the price of stuff increases, the power of the dollar decreases.
That’s a super simple explanation. There are all kinds of economic nuances to inflation but I’m not an economist. And I don’t pretend to be one.
I’m more qualified (and interested) in the impacts of inflation on investments—real estate or otherwise.
At the time of this publishing, there are concerns about inflation as the US economy recovers from the Coronavirus pandemic, and there are signs it is starting (e.g., supply issues, rising demand [for goods and services], rising rents, rising corn prices, and more). Plus, in May, a report from the Labor Department showed that consumer prices rose to 4.2% YOY in April—the biggest increase since 2008.
Still, we aren’t in a worrying state just yet and there’s no indication we’ll experience break-neck inflation like we saw in the 1970s and 1980s.
So this is more of a “what if” article.
What if more widespread, sustained inflation happens? More importantly, what does that mean for accredited investors?
Real quick, it’s important to know the difference between good and bad inflation. The Fed considers 2% inflation to be good if it’s consistent from year to year, so everyone can plan around it. Bad inflation, which is today’s concern, is when we lose track or we can’t predict what it’s going to be—up or down.
If widespread, sustained inflation happens…
– Investors’ returns will most likely be eroded across their portfolios
– The uncertainty could increase investors’ desire to “hold,” which could increase opportunity cost (of not investing)
There are other potential implications like hoarding of goods and more supply issues, but I’ve listed two, nontheoretical implications for investors.
And for accredited investors…
– A portfolio that earns 2% ain’t gonna cut it (i.e.: that portfolio may lose purchasing power each year)
– Diversification can help manage inflation risk. It doesn’t guarantee anything but it helps calm the waters, which is a good thing when there are waves of unpredictability
NOTE: Adding real estate Notes to the mix should be a consideration. They’re cash-flowing investments that, historically, consistently provide an annual rate of return of 8%.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS
Faller Financial is growing. We are currently seeking real estate Note sale opportunities worth $5MM or greater.
Additionally, we are seeking Accredited Investors interested in deploying capital.